Move over Portugal, Germany is Europe\’s real concern this week

Remember last week\’s Portuguese banking jitters brought on by Espírito Santo International SA missing a debt payment? Stock markets seem to already have forgotten. For now, European investors have taken their eyes off the latest European banking scandal and are instead gearing up for a week dominated by economic data and the beginning of the second-quarter earnings season.

And if Monday\’s data are any indication, we could be in for a rough week. Industrial production in the euro zone slumped so much in May that it\’s taking us back to the dark days of 2012. The 1.1% month-on-month slump wasn\’t unexpected though, after those awful numbers out of Germany, France and Italy last week.

German ZEW: We could get more bad news out of Germany Tuesday. German investor confidence fell for a sixth straight month in June and analysts at HSBC forecast one more month of declining sentiment driven by fear of weak economic growth worldwide. The ZEW current conditions index, however, should continue to rise after reaching a cyclical high in June.

Analysts at Commerzbank called Germany a \”strong man with weak knees\” and said the economy probably stalled in the second quarter.

\”While this does not mean that the upswing is over, it is becoming increasingly clear that Germany will not be able to drive growth in the euro area single-handedly. In combination with a low inflation rate, this will keep the discussion about broad-based ECB bond purchases alive,\” they said in a note.

Euro-zone final inflation: This is not the headline report it used to be, but as the Espirito Santo scandal showed last week, the focus can change quite quickly. The flash data for June showed inflation remained at a more-than four-year low of 0.5% and little suggest the final print should be any different.

Inflation at 0.5% is by no means desirable and quite far from the ECB\’s target of close to, but below 2%. A confirmation of this low level, however, is unlikely to see the central bank storm toward QE — the ECB will probably want to see if the TLTRO and other liquidity measures announced at the June are boosting lending and helping drive up inflation before embarking on anything more aggressive.

U.K. inflation:Expect a very different scenario than in the euro zone. Inflation in the U.K. did fall to 1.5% in May, but it\’s forecast to have gained 1.6% in June. Philip Shaw, chief economist at Investec Securities, stressed that \”the short-to-medium term outlook is benign.\” The data will be released Tuesday.

U.K. unemployment:Here\’s where it gets interesting for U.K. data this week. The labor market has been the most impressive piece of the country\’s recovery, and further improvement will play a key role in terms of future monetary policy. Minutes from the recent Bank of England meetings already indicate that some members think it\’s time to have a serious discussion about raising interest rates. BOE Governor Mark Carney has said rates are likely to go up sooner than markets expect. But he has been criticized for sending mixed messages to households and businesses on the future of interest rates.

On Wednesday, Carney might see more upbeat data that will bolster calls for higher rates. Unemployment for the three months through May is forecast to fall to 6.5%, while the claimant count is expected to have continued its recent pace of declines. And after dropping to 0.7% in April (including bonuses), it\’s possible that wage growth could fall even further in May and dampen expectations for a 2014 rate hike.

\”Again we would keep a close eye on the other indications of labor market tightness since they will form much of the MPC’s judgement over economic slack and therefore play a large part in determining the timing of the first rise in rates,\” Shaw said.

Mark Carney testimony:The BOE boss will appear before the Treasury Select Committee on Tuesday and may be grilled on the central bank\’s measures to cool the housing market.

Earnings:It\’s that time of the quarter again — earnings season. The second-quarter results season will be in full swing in the U.S. this week, with Goldman Sachs
, JPMorgan Chase
, Intel
and Yahoo
, but don\’t forget the excitement coming out of Europe as well.

Bellwether for the global manufacturing sector SKF
– the world\’s biggest maker of ballbearings — reports half-year earnings on Tuesday and analysts will be looking for clues on volumes in Europe, the U.S. and China. Morgan Stanley said the geographical volumes are \”a very good indication of what to expect during the season for the rest of the cap goods space.\”

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